Principle responsibilities
- Protect and grow capital
- Be present for investment partners ("we are in the customer service business")
- Create the kind of firm where team mates could spend their entire career and/or start their own partnership
- Develop a reputation of being the best investor to portfolio companies and their managers
Summer associated each take on two deep-dives.
Optimizing for generating hall of fame returns
- Small team
- Small number of investors
- Small number of investments that they know extremely well
Day 1 launch advice: think really hard only about what will really mater 5+ years from now. Narrows down the variables necessary to build the skills that will be enduring as a long-term investor, and hones the variables that will results in the best long-term investments.
Starting in 2018: quit looking at daily P&L (just looks at the monthly before it goes out)
Net inflow in first 7 years was $280m; finished 2020 at $1b.
"Work on the important problems."
Un-coachable traits for investment success
- Passion for investing
- Work ethic (learning and working machines)
- Resilience ("heart of a champion") — often have a history of personal and/or professional challenges...and they come back stronger
- Open mindedness
Asset allocators —> the best ones are asset owners. Need to be as excited as investment team about what is in the portfolio. Need partners who want to know what they own and care to dig into it.
10 businesses currently in the portfolio ($1.5B AUM as at end-Q2)
A true warrior, like tea, shows his strength in hot water. — Chinese Proverb
Selection biases (learned over the past 7 years
- Owner-operators
- with large amounts of skin in the game
Quote: "We want to spend high-quality time, studying high-quality people, building high-quality businesses, on behalf of high-quality investors.
How do you create an intellectual tension? Risk of a team-based approach is that everyone buys into the cooking (group think). Ways to create/raise intellectual tension:
- CIO does not get involved in initial sponsorship of idea (junior team mates must be principal sponsor, then bring in secondary sponsor, etc. — forces building of consensus — then CIO steps in and tries to kill the idea. If they can't, it passes. ShawSpring does this as well.
When making an investment, team identifies the most important drivers of the investment thesis over the long-term, then use data sources to regularly track businesses towards those KPIs. Long-term growth/success is the aggregation of many periods of short-term business performance vs. those KPIs.
Selecting what information to watch
- Try to stay engaged in activities that maximize return on time and effort spent
- Hence focus on identifying key variables that will drive the success or failure of investments
- Growing AUM = larger research budget = time savings
- Each investment professional has a fully discretionary research budget
- "Go look" concept — experiment and learn
- Full time research team of 3 (including Dennis) — each can do 7-10 deep dives per year; 1-2 make it to the finish line (there are 5 full-time total staff)
- For those that fail, if the fail on quality, try to fail fast
- For those that fail, if they fail on hurdle rate (30% 3-5 year IRR at least — looking for 3-4x over 3-5 years) —> ends up on the "trigger-ready" list
- Arbiter for quality = ecosystem control
- Have 200 name shopping list of firms that have ecosystem control
- Have trigger-ready list of businesses where research has been completed, businesses have ecosystem control, manager are excellent, they welcome ShawSpring involvement, but price is not where it needs to be — therefore once price hits point where it could meet the hurdle rate it could be a candidate for inclusion in the portfolio
- Portfolio of 5-10 positions
- Priorities for new FCF are almost always to the existing portfolio
In March 2020, Andy Grove quote was guiding point: which companies will be improved by Covid-19?
Preparing for circumstances that create a long-tail event (e.g. target list > trigger ready list) is possible.
What is a high-quality partner?
- An asset owner — they really care about what they own; they want to dig in, learn, and share i.e. be part of the ethos of the partnership
- Currently have 17 institutions; goal is 15-20 total. No intermediaries — no marketing or IR departments; all partners have direct access to CIO and team
- ShawSpring does as much due diligence on potential partners as those partners do on them; most partners are pre-vetted by existing partners
Manage 1-10% of each partner's balance sheet. For friends and family: "invest enough that if we do well it will make a meaningful difference in your life, but not so much that if it all goes to 0 we are no longer friends." (that said, Dennis has all his money in ShawSpring.)
Funds starting with under $200m AUM have less than 50% chance of surviving the first 3-5 years.
Running $10M > $350M > $1.5B has felt the same from a portfolio management perspective. The main difference has been in research resources e.g. hiring a data science team that provide a daily snapshot of performance of all businesses under coverage. Have 2 expert networks under retainer.
Growing R&D budget has expanded the imaginations of the team. Will likely start a research office in Asia, and potentially build a presence, brand, and ecosystem there. Asia will likely be the source of some of the best ideas in the coming years.
Have a clarity about what your optimization problem is. (ShawSpring = hall of fame returns)
Then isolate only the variables that would get you there.
"Progress requires change."